What is employee arbitration and how does it work in practice?

If you’re like many Americans, you’ve likely heard of the arbitration process. It touches many (if not most) of the contracts the average person enters into on a routine basis.

From a service contract with a cellphone provider to a lease agreement for a rental apartment, to the clickwrap agreement you’re required to acknowledge before you buy a concert ticket online, arbitration agreements are everywhere, and they carry legal weight.

Arbitration agreements are extremely common in consumer contracts, but they’re also very often found in agreements between employers and employees.

In this article, we’ll discuss the arbitration process in the context of HR—how it affects companies, how it affects employees, and whether your organization should have an arbitration agreement in its boilerplate employee contract.

Whether your business has been threatened with a lawsuit by a current or former employee, or if you’ve simply downloaded a template employee agreement and are seeking help understanding some of the legalese, we’re here to help.

What is Arbitration in the Context of Human Resources?

Many employee contracts feature an arbitration clause, and the use of these clauses is undoubtedly on the rise.

According to the National Employment Lawyers Association, in 2010, 27 percent of employers in the United States required employees to sign an arbitration agreement as a condition of their employment.

Research by the Economic Policy Institute shows that in 2017, that number jumped to more than half (53.9 percent) of non-union private sector employers.

The percentage was even higher among companies with 1,000 or more employees: of all larger U.S. companies, 65.1 percent had mandatory arbitration procedures.

What is an Employee Arbitration Agreement?

An “employee arbitration agreement”, also known as an “employee arbitration clause” or an “employee arbitration provision”, is a portion of the larger contract that your employee signs before they begin working for you.

Keep in mind that the employee contract containing the arbitration provision may exist as an offer letter or even as an employee handbook.

Here is an example of a basic and brief employee arbitration agreement:

Should any dispute between Employee and Employer arise at any time out of any aspect of the employment relationship, including, but not limited to, the hiring, performance, or termination of employment and/or cessation of employment with the Employer and/or against any employee, officer, alleged agent, director, affiliate, subsidiary or sister company relationship, or relating to an application or candidacy for employment, Employee and Employer will confer in good faith to resolve promptly such dispute. In the event that Employer and Employee are unable to resolve their dispute, and should either desire to pursue a claim against the other party, both Employer and Employee agree to have the dispute resolved by final and binding Arbitration.

The Employee and Employer agree that the Arbitration shall be held in the county and state where Employee currently works for Employer or most recently worked for Employer.

At its core, an employee arbitration clause simply states that legal disputes between the parties—generally the employer and employee—will be settled in arbitration, but still within the confines of the judiciary system.

Most employees don’t ask questions about these provisions, and to be fair, even the most experienced Human Resources professionals don’t fully understand what they entail.

Do Employee Arbitration Agreements Benefit Employers or Employees?

While arbitration agreements help both parties control the cost of a potential lawsuit and avoid the high fees associated with litigation (a.k.a., hiring attorneys to go back and forth with the courts, and each other, on your behalf), employee arbitration clauses are designed to benefit employers.

This is why they’re often stuck toward the end of an employment contract or offer letter.

They aren’t always foolproof, though.

As we’ll discuss later in the article, there are red flags to watch out for and reasons to revisit and scrutinize your template arbitration provisions routinely.

How Does the Employee Arbitration Process Work?

Employee arbitration, when mandated by an employment contract, is a compulsory process that is designated as an alternative to the traditional litigation process when an employee brings a suit against their employer.

In other words, if an employee arbitration clause is a valid part of an employee’s contract, and the employee threatens legal action against their employer, the employer may be able to compel (or force) the employee to arbitrate the claim.

The employee arbitration process generally goes like this:

1. The employee signs an arbitration agreement. As we mentioned, the arbitration agreement could exist as a clause or provision within a larger employment contract, offer letter, or employee handbook.
2. The employee brings a claim against the employer. This may or may not be done through an attorney. In any event, the company should retain its own counsel and encourage the employee to do the same.
3. The employer compels arbitration. The company should communicate to the employee’s attorney that they will be compelling arbitration of the employee’s dispute.
4. The parties will select an arbitrator. Parties will generally have a choice of available arbitrators, depending on their area. Arbitrators are typically current or retired judges or professional attorney-mediators. Employers or their counsel may have preferred arbitrators, but the employee has a right to an unbiased arbitrator, too. If the parties cannot agree on an arbitrator, the arbitrator may be appointed by the court. Once an arbitrator is selected, the parties will work with the arbitrator to set a date for the arbitration hearing.
5. The arbitration hearing will occur. Unlike a trial, an arbitration hearing is closed off from the public. Much like a regular judicial proceeding, however, during the arbitration hearing, the parties can present evidence, call witnesses, and “plead their case” to the arbitrator.
6. The arbitrator will issue a decision. Sometime after the hearing (but usually not immediately), the arbitrator will issue their final decision in writing. The decision of the arbitrator is almost always final and binding. Arbitration decisions are extremely difficult, if not impossible, to appeal or overturn in court.

What an Employee Arbitration Agreement Can (and Cannot) Protect an Employer From?

Employee arbitration provisions are designed to compel arbitration for a wide range of employer-employee disputes—and usually, they do just that.

Even in the midst of federal and state regulations limiting the scope of arbitration, employers can still protect themselves from costly litigation over most employment issues, including disputes over payment of commissions, wrongful termination claims, breach of contract, indemnification, and the like.

Recently, however, new laws, including a deluge of state laws, have limited which types of claims can be compelled to arbitration.

There are many types of claims that generally cannot be compelled to arbitration. Included among these are “administrative charges,” or claims that can be filed with a government agency, such as the Equal Employment Opportunity Commission (EEOC), the Civil Rights Department, or the Employment Development Agency.

These charges often involve employee claims surrounding unfair labor practices under the National Labor Relations Act, acts of retaliation, discrimination based on a protected trait, workers’ compensation benefits, disability benefits, or employment insurance.

Sexual assault claims and most sexual harassment claims also may not be compelled to arbitration.

When are Employee Arbitration Agreements Unenforceable:

Employee arbitration agreements are enforceable (in the eyes of a court) as long as they are fair. In legalese, attorneys might refer to an arbitration agreement that is “unfair” as “unconscionable.” If an employee arbitration is unconscionable, it won’t be enforced, and you’ll have to go through the traditional litigation process if an employee brings suit. Reasons an employee arbitration agreement may be deemed unconscionable can include:

• The arbitration agreement is one-sided. An agreement will be unenforceable if it requires an employee to submit their claims to arbitration, but doesn’t impose the same restrictions on the company.
• The arbitration agreement doesn’t allow the employee an equal say in selecting an arbitrator. As discussed, employees have the right to an unbiased arbitrator.
• The arbitration agreement was signed at an inappropriate time. If a company requests an employee to sign an arbitration agreement after the employee has reason to bring a claim, the agreement may be seen as unenforceable, as questions regarding duress could arise.
• The arbitration agreement presents unallowable limits. Arbitration agreements cannot limit the amount of money an employee can recover during the arbitration process; that is a decision for the arbitrator alone. Agreements also may not alter the amount of time (a.k.a. the legally prescribed “state of limitations”) that an employee has to bring a claim against their employer; those time limits are set by the government.

Benefits of Employee Arbitration:

• Arbitration agreements help employers protect their public brand identity. Unlike traditional litigation, arbitration is a confidential process. During litigation, trials are almost always public, and, unless special circumstances exist, so are many court filings. This means that anyone (including the media) can read lengthy briefs that may include detailed employee allegations about your company—details that may or may not be true.
• Employee arbitration can help companies avoid class action lawsuits. When a group of employees threatens a joint lawsuit, they may have standing to sue as a “class.” Bringing a class claim can encourage employees who may not have otherwise joined an action to participate—especially since law firms are often permitted to contact employees and alert them of their rights to a potential class claim in many circumstances. Compelling individualized arbitration is a way for employers to handle employee cases one by one, preventing the expensive settlements often demanded (and awarded) in large class action cases.
• Arbitration can help you save on outside counsel fees. Experienced outside counsel is expensive, and when attorneys engage in litigation, billable hours can rack up quickly. In some states, such as North Carolina, arbitration hearings are limited to just one hour, with each side having only 30 minutes to testify and present evidence and witnesses.
• Arbitration decisions generally can’t be appealed. While this obviously isn’t a “benefit” if the arbitrator’s decision is unfavorable to you, the lack of an arbitration appeals process does save both parties time and money. Filing an appeal and writing an appellate brief (and reply) is expensive and time-consuming, something that parties get to skip in arbitration.

Drawbacks of Employee Arbitration:

• Arbitration clauses are not always enforceable. As outlined above, employers are powerless to compel arbitration in certain situations. The claims over which you can compel arbitration may be further restricted based on your geographic location (i.e., your state and local laws) or the union status of your employees.
• Arbitration clauses may jeopardize your reputation in the eyes of your employees. The culture of every workplace is different, but some companies may find that their arbitration agreements can cost them the hard-earned trust of their team members. In 2019, Google made headlines for ending mandatory employee arbitration in response to a huge push from its employees.

The Employee Arbitration Cases and Legislation the Astute HR Professional Should Know:

The legal landscape of human resources management is always changing, and staying up-to-date can give you a leg up in the dynamic environment.

Here are a few of the most significant landmark employee arbitration cases and pieces of legislation that give context to our discussions of arbitration in the context of HR:

• Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83. The Armendarizcase is perhaps the most critical landmark employee arbitration agreement case of the 21^st century. This case set forth the minimum “fairness” standards for arbitration agreements. After Armendariz, employers were not permitted to shorten the statute of limitations for employee claims, force employees to pay unreasonable costs associated with arbitration, or restrict an employee-claimant’s access to a neutral arbitrator.
• The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021: This piece of legislation, which had bipartisan support, added a significant new prohibition to the Federal Arbitration Act. As of its effective date, employers are no longer permitted to compel arbitration of claims involving sexual harassment or assault under state or federal law. Employees are entitled to bring these claims in front of a judge or jury and to make them public.
• Epic Systems Corp. v. Lewis (2018) 138 S. Ct. 1612. In Epic Systems, the United States Supreme Court ruled that an employer’s right to compel individualized arbitration did not violate an employee’s right to organize with other employees under the National Labor Relations Act. In effect, this case helped solidify the enforceability of class action waivers in employment contracts.

Understanding your Employee Arbitration Agreement is One of Many Facets of Onboarding.

HR professionals and managers need to have clear and straightforward instructions regarding the onboarding of new employees. Having a clear picture of what the provisions of your employment contracts actually say could have a material effect on any future arbitration proceeding.